Microeconomics
Microeconomics
11th Edition
ISBN: 9781260507140
Author: David C. Colander
Publisher: McGraw Hill Education
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Chapter 16, Problem 4QAP
To determine

The suggestion of the statement about the long-term environmental sustainability of free market decisions.

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NutraSweet Aspartame is a low-calorie, high-intensity sweetener known by Monsanto’s brand name, NutraSweet. It was the key to the success of Diet Coke and Diet Pepsi in the 1980s. NutraSweet made billions of dollars, yielding very high profits. Such profits usually attract entry, but in this case entry was barred by a patent on the sweetener and because the process of creating the sweetener was expensive and difficult. Monsanto had a distinct capability—its monopoly. It had also created another strategic asset—the NutraSweet brand name as represented by its trademark ‘swirl.’ The problem was that Monsanto’s patent was about to expire. As a result, the Holland Sweetener Company began building an aspartame plant in Geleen, the Netherlands, to challenge Monsanto’s hold on the aspartame market. Holland Sweetener was a joint venture between the Japanese Tosoh Corporation and DSM (Dutch State Mines). What did Monsanto do?  Why? What did Holland Sweetener do?  Why?
Two firms, A and B, are each considering trying to develop a newwidget. Whichever firm is first to develop the new widget wins a patent worth $20 million plus a penny.Developing a new widget involves several ‘steps’. The firms alternate moves, with A moving first, until oneof them wins the patent. All moves are observed. In each turn, a firm can choose whether to take 0, 1, or2 development ‘steps’. Taking 0 steps in a turn costs that firm $0. Taking 1 step in a turn costs $4 million.And taking 2 steps in a turn costs $11 million. For simplicity, assume a zero discount rate. Initially, eachfirm is 4 steps away from completing development.(a) Describe and explain carefully what will happen in this patent race and why. [Hint: it may help toread Dutta ch 12 (but notice I changed the numbers).](b) Very briefly explain what is the economic rationale for granting ‘intellectual property rights’ such aspatents. What are some disadvantages for society of granting such rights?
Recently, Pfizer and Allergan—the makers of Viagra and Botox, respectively—initiated a $160 billion merger. Pharmaceutical companies tend to spend a greater percentage of sales on R&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Food and Drug Administration. For instance, Allergan spent large sums of money developing its popular wrinkle-removing neurotoxin, Botox, which is currently protected under a patent. Botox sells for about $15 per vial. Calculate the Lerner index if the marginal cost of producing Botox is $1.50 per vial. Does the Lerner index make sense in this situation?
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